Factoring as an Innovative Way to Finance SMEs: Get Cash Now and Avoid Defaults

In international transactions, small and medium-sized enterprises (SMEs) run the risk of customers paying their bills either too late or not at all. Businesses that transfer their accounts receivable to a factoring company immediately receive liquid funds while avoiding defaults. Credit Suisse is now launching a solution, called Business Easy Factoring, that addresses the specific needs of small and medium-sized exporters.

Many Swiss SMEs supply highly specialized niche markets and enjoy worldwide success as hidden champions. However, companies that send goods abroad on invoice also take certain risks. Depending on the country, business is such that, from time to time, payment deadlines are extended or missed. When bills are paid late, SMEs can quickly become strapped for cash. If an account is not settled at all, enforcing that claim in a foreign country can often prove difficult, and the chances of success are not certain. Moreover, in some countries and regions, the risk of default is extremely high.

Just Hand Over Your Outstanding Balances

With factoring, you can avoid these risks associated with cross-border transactions. An exporter transfers its accounts receivable to a factor such as a bank. In exchange, the company immediately receives liquid funds. The biggest advantage is that it does not have to wait for the bill to be paid. It can put the funds to use with no delay. For example, the funds can be used to purchase raw materials or pay wages. An added benefit is that it effectively safeguards the company against payment defaults. The risk of loss is borne by the factor's insurance company.

Immediate Cash Flow Also Cuts Costs

As with every form of financing, factoring involves certain costs. There is an interest charge for providing advance payment of the invoice amounts. However, in the current environment of historically low interest rates, that charge is very affordable. You will also pay the factor a commission, comparable to an insurance premium, for assuming the risk of default. The amount is based on the risk from doing business in the foreign country. In most European nations, the risk is rather low. In some regions of South America and Africa, it is much higher.

Nonetheless, these fees can quickly pay for themselves in practice. If an SME speeds up its cash flow as a result of factoring, it can pay its suppliers sooner, sometimes taking advantage of generous early payment discounts. Moreover, even a single default can have severe consequences. If a customer defaults on a bill of, say, over 100,000 Swiss francs, a company with a profit margin of 10 percent will have to generate an additional million Swiss francs in revenue to make up for the loss. Many companies would find it impossible to boost their sales that much within a year.

Business Easy Factoring – Specially Designed for SMEs

Until now, SMEs with sales of less than 10 million Swiss francs have been unable to receive in-house factoring, leaving companies in control of their receivables management. Part of the reason why is that most companies previously employing this method of finance in Switzerland have been medium-sized to large corporations such as wholesalers. Experience has shown, however, that established SMEs with long-term market presence in particular also desire this type of solution. To fulfill this need, Credit Suisse introduced Business Easy Factoring in early 2015.

The key difference between it and conventional factoring is that the accounts receivable are not sold but only assigned – that is, transferred. This can be done using a confidential procedure in which the debtors are not informed. By receiving an "assignment credit," the company can then quickly access the funds without any red tape. The technology is designed to be very simple. Your SME uploads a list of its accounts receivable using an application called Factoring-Net. They are automatically reviewed. If there is adequate insurance coverage, the corresponding funds are posted to your current account as an overdraft limit almost immediately.

Very Few Requirements to Meet

Business Easy Factoring is available to any business with 0.5 million to 10 million Swiss francs in annual revenue, if they mainly do business in Switzerland or other countries in Europe. In addition, for accounts receivable to be transferable, they also need to be uncontested. That means the goods must have been verifiably delivered or the service provided and documented. Furthermore, the SME should also have flawless bookkeeping, since the receivables management remains in its own hands. Business Easy Factoring can also be used only to receive advances on receivables from other businesses. Invoices addressed to private individuals are not eligible.

Whether you choose Business Easy Factoring, In-House Factoring, or Full-Service Factoring, we can put together the right solution for every exporter according to your specific needs. Factoring can have a twofold advantage. Having flexible cash flow and avoiding defaults can mean a significant competitive edge in economically turbulent times such as these.

Ensure Liquidity and Avoid Risks

By offering multi-level solutions, we can provide the right solution for any company:

Business Easy Factoring: Assign (transfer) your accounts receivable to the factoring company. The funds are made available in the form of a loan. Your debtors can be notified of the transfer.

In-House Factoring: Sell your accounts receivable to the factoring company. Your debtors can be notified of the transfer. Your company retains control over its receivables management.

Full-Service Factoring: Sell your accounts receivable to the factoring company. Your debtors are notified of the transfer. The factor also assumes control of the receivables management.